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How a Pasadena Investing Firm Spun a Boom That Fizzled : Securities: Conversion Industries' history shows it was involved in dizzying financial cross-dealings.


To skeptics, John P. McGrain's financial empire at Conversion Industries was a house of cards waiting for a stiff breeze.

Last week, it was more than a breeze that blew through Conversion's Pasadena offices: Within a period of four days, the American Stock Exchange decided to delist the company over disclosure issues, the stock lost nearly all of its value, McGrain resigned as CEO and some of Conversion's dozen-plus affiliated businesses began scrambling to distance themselves from the spreading morass.

By Friday, Conversion had named a largely unknown investment banker as its new CEO and pledged an all-out effort to "repair its relationship" with the Amex, which had not taken such strong action against any firm in almost a quarter century. Meanwhile, with trading officially halted, Conversion stockholders still had no way to trade their shares, which sold as high as $33.25 in 1993 but were quoted at $1.38 last Wednesday.

Conversion's future is far from certain now, but whatever its fate, the company's investors should have seen the red flags long ago. Since the onetime Canadian energy firm metamorphosed into a self-styled investment company in 1991, it has engaged in more than a few financial practices that have raised Wall Street eyebrows.


By using a controversial Colorado penny-stock brokerage to underwrite many of its spinoff companies, for example, Conversion virtually invited the scrutiny of "short sellers," professional traders who make a living betting against stocks they believe are grossly inflated in value.

Conversion and its spinoffs were also involved in dizzying financial cross-dealings and interlocking directorships--some of which, the firm has acknowledged, gave the appearance of conflict of interest.

All of this was engineered by McGrain--who declined to be interviewed for this story--and a full-time staff of just 14 people in the company's Colorado Boulevard headquarters. Despite the "Industries" in its name--and a stock market value of $170 million at its peak--Conversion does not manufacture anything; it exists solely to deal in shares of other companies.

Conversion's stated mission is the "identification of, investment in and sponsorship of emerging growth companies." The basic idea is to find intriguing little companies, pump money into them, then take them public via stock offerings 12 to 18 months later.

If Conversion could invest in a hot business concept at a cheap price, individual investors conceivably could be enticed to pay a higher price for the business later. Conversion could make money either by selling its stake in the business to new investors, or by holding the shares as they appreciated--and borrowing money against that stock to use for new investments.

Exactly why Conversion decided to enter the so-called merchant-banking business in the first place is not clear. From 1984 to 1991, the firm was involved in development of "alternative-energy" facilities, though little appears to have come of that.

McGrain, now 49, a former Southland stockbroker, headed Conversion all through the 1980s, when he also dabbled in oil and gas ventures. Officially Conversion remains incorporated in Canada; its stock first traded on the Vancouver Stock Exchange before migrating to the Amex in 1988.

Conversion attracted little attention with its initial investments, in 1991 and early 1992, in tiny entities such as an energy-management consultant and a Canadian oil exploration outfit named International Colin Energy. But things began to heat up in mid-1992, after Conversion raised $10.2 million in a new public offering of its shares and shares of International Colin.

To sell that stock, Conversion enlisted the services of Tamaron Investments, an Englewood, Colo.-based penny-stock brokerage that Conversion had previously used to underwrite small share offerings of companies in Conversion's portfolio.

So close were the ties between Conversion and Tamaron, in fact, that Conversion CEO McGrain personally lent Tamaron $1 million to give the brokerage the capital it said it needed to launch Conversion's 1992 stock offering, according to documents filed with the Securities and Exchange Commission.

Flush with cash in mid-1992, Conversion shifted into high gear. In one major transaction, Conversion agreed that October to take a big stake in a private Canadian oil well servicing company called Beta Well Service. Beta's CEO, William J. Gordica, had known McGrain since the early 1980s and been a Conversion director since 1987.


But instead of having Conversion inject cash into Beta, friends McGrain and Gordica did a trade: Conversion took 1.15 million shares of Beta from Gordica, and in return he got 307,874 shares of Conversion.

Then, using Tamaron, Conversion took Beta public in January, 1993, while also distributing more than half of Conversion's Beta shares to Conversion shareholders in the form of a stock dividend.

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